韩山师范学院财务管理课件第十三章 Risk and Capital Budgeting.ppt

Chapter 13 Risk and CapitalBudgeting Chapter 13 - Outline LT 13-1 What is Risk? Statistical Measurements of Risk Beta Coefficient of Correlation The Efficient Frontier What is Risk? LT 13-2 Risk means uncertainty about a future outcome Risk varies greatly depending on the investment: –A T-Bill has zero or no risk – A gold-mining expedition in Africa has high risk Most investors and financial managers are risk averse, meaning they don’t like risk Statistical Measurements of Risk LT 13-3 Expected Value: – equal to weighted average of outcomes x probabilities Standard Deviation: – measure of dispersion or variability around the expected value – the larger the standard deviation ? the greater the risk Coefficient of Variation: – equal to standard deviation / expected value – the larger the coefficient of variation ? the greater the risk Beta LT 13-4 Beta is a statistical measure of volatility It measures how responsive or sensitive a stock is to market movements in general An individual stock’s beta shows how it compares to the market as a whole: beta = 1 means equal risk with the market beta 1 means more risky than the market beta 1 means less risky than the market Coefficient of Correlation LT 13-5 Shows the extent of correlation among projects Has a numerical value of between -1 and +1 Its value shows the risk reduction between projects: Negative correlation (-1) ? Large risk reduction No correlation (0) ? Some risk reduction Positive correlation (+1) ? No risk reduction Coefficient of Correlation ? Coefficient of Variation The Efficient Frontier LT 13-6 Firm chooses combinations of projects with the best trade-off between risk and return 2 objectives of management: – Achieve the highest possible return at a given risk level – Provide the lowest possible risk at a given return level The Efficient Frontier is the best risk-return line or combination of possibilities Firm must decide